Jack Dorsey sold his first Tweet as an NFT for 2.9 million for charity. Large-scale sales are making the news and creating questions about the future of cryptocurrency and blockchain technology related to user safety and fraud. Policies are slow to be created that would offer buyer-seller protections during these high-stake transactions.
An effective marketplace has intermediaries that protect the integrity of a purchase agreement. Cryptocurrencies, NFTs, and blockchain technologies should seek to have these protections in place to prevent fraud and protect the integrity of their systems.
The attraction of NFTs as investment opportunities has become prevalent among those wishing to mint their digital media and profit from the sale. How can NFT owners protect these potentially lucrative long-term investments?
What Is An NFT?
Non-fungible tokens, known as NFTs, have gained widespread popularity and intrigue over the last few years. These tokens are linked to the Ethereum blockchain and represent unique digital ownership of media files, photographs, and more. NFTs are appealing because an NFT on the blockchain contains distinctive hash and metadata created for a particular media file, whether a graphic, photograph, or other digital file types. The significance of NFTs is that, like physical assets, digital assets are finite and can be traded purposefully.
The Growing NFT Marketplace
The catalyst for most NFT investors is the long-term value prospect of the NFT market. With some NFTs selling for millions of dollars, there is an environment that can be favorable for investors with a substantial risk tolerance– especially those that can get in early to sell these assets at a higher value in the future. The need to protect these digital assets has grown significantly in an increasingly digital world.
Another appeal for NFT investors is the chance to establish “social capital.” Social capital refers to the networks of societal relationships and the perceived status of those within these networks. This is the driving force behind the “Keeping-Up-With-The-Jones” mentality. NFTs are the new digital status symbols.
One does not purchase a Rolex because they only need a watch, instead they want to own a luxury watch and want others to see and admire it too. As observed with the Pavlovian Hierarchy of Needs, humans, as social beings, need to feel accepted. These status symbols promote messages and feelings of acceptance and admiration, which is historically seen in the fine art marketplace.
The emergence of NFT projects and increased popularity of digital assets have created a group of individuals who use the marketplace to launch brands, showcase their social capital and join themselves with the crypto community.
Well-functioning marketplaces require well-defined and enforceable property rights. There are trusted intermediaries to protect these property rights, including property deeds from the county clerk’s office or vehicle titles from the DMV. These intermediaries exist to protect the property owner’s rights and show proof of the transaction overall.
Challenges to NFT Insurance Coverage
Due to the increased movement towards NFTs being the next advantageous path in the fine art world, insurance providers are working to figure out how to offer coverage for those involved in the e-commerce of these tokens, including selling, buying, and trading.
NFTs are not all comparable because some are entirely digital, and others represent tangible items. Because of this, it can make it difficult to pinpoint exactly what types of insurance coverages could be applied to NFTs.
The insurance coverage options available for NFTs are limited because they are digital and, therefore, physically non-existent assets. NFTs would not be covered under a standard insurance policy designed to protect physical assets.
As NFTs do not exist in the physical space, they are excluded from many typical insurance policies.
NFT insurance coverage challenges include the immaterial nature of NFTs, which prevents underwriters from supplying coverage under their current reinsurance agreements and policy language structures. The ever-changing valuations of cryptocurrencies and NFTs also make it hard to pinpoint the exact value determination for the NFT asset, as the value of the individual NFT is dependent on a large variety of variables, many of them completely non-controllable.
The main challenges that arise when determining future NFT coverage options are:
1. NFTs are non-physical representations of digital media, making it hard to determine the appropriate insurance type in existing insurance policies.
2. The NFT evaluation process is also more difficult as no set figure is assigned to the NFT, and the value is constantly changing.
3. There is much to learn about NFTs and the impact this technology can have on future marketplaces.
NFTs are recently gaining widespread popularity, with an inevitable need for insurance of these assets emerging. As we learn more about these intriguing technologies, providers will take more steps to protect these digital assets. It is inevitable in a virtual, cryptographic marketplace such as this, especially with the large-scale and highly profitable transactions that have taken place.
To protect digital assets, including NFTs, the insurance industry is racing to develop new forms of coverage designed to protect from the inherent risks of NFTs.
William R. Simon, Jr., asset protection attorney in California and Founder and Chief Counsel at Sollertis, a law firm specializing in asset protection, recommends “…you encompass all digital assets into your overarching asset protection strategy. While insurance, in the future, might be a tool to enhance the protection of your digital assets, it will not negate the need for a comprehensive asset protection plan.”
NFTs And The Future
In modern times, transferring ownership involves transferring the legal right to use a particular asset, whether that be a house, a car, or a digital asset. This framework fits well with NFTs, which can be created to represent titles, deeds, or licenses legally. NFTs have the potential to reliably trace the transfer of ownership records without the need for third-party involvement to verify the integrity of these transactions. The ability to instantly track and validate ownership of each unique item makes NFTs suited to disrupt any marketplace where verifying the legitimacy of an individual item can be faulty or inadequate, or require the participation of a third-party intermediary.
Many instances in the physical world would greatly benefit from a reliable, transparent, and automated system designed to group and organize non-fungible goods. This technology is also being studied additionally to host insurance documents and policies.
Asset Protection Plans that Protect Your NFTs
If you have digital assets, such as NFTs, you want to protect them as you would any other investment. Understanding the emerging industry trends regarding NFT insurance can give you options, but with a volatile market and insurance being a for-profit business, you’d be well suited to look into protection options other than insurance alone.
If you have an estate plan or an asset protection plan, it should includeprotection for your NFTs – but this is an intricate process. Asset protection attorney William R. Simon, Jr., Chief Counsel at Sollertiswill work with people holding NFTs to help them understand how to protect digital assets and how NFT protection intersects with an overall asset protection plan.
The best investment decisions are made based on the risk tolerance and the goals of an investor. An asset protection strategy can help clarify investment goals and provide an assessment of risk vs. returns when considering NFTs and other digital assets.
The hope is that potential insurance coverage for NFTs will one day protect against some risks customarily associated with digital commerce, such as fraud and intellectual property claims. NFTs could potentially create a world where all documents and certificates are kept on the blockchain to verify authenticity. Each person would have a wallet to access these important documents, including high-stake items like car titles and home deeds, and other critical agreements.
With the increased prevalence of cryptocurrency and NFT transactions, insurance options will continue to emerge. Until reputable insurance companies provide insurance for NFTs, such assets should be protected by due diligence, cybersecurity measures, and inclusion in a comprehensive asset protection plan.